Inside The $100M Startup: What They Do And Where They Grow

There are startups, and then there are startups that skyrocket into the stratosphere and exceed $100 millon in annual revenue. While most startups are 1-person businesses and not designed for massive growth, a select few -- between 125-250 -- are founded each year that will become major sources of new jobs and new wealth.

These are companies that matter to the economy, especially to the health of the cities where they are based -- the Amazons and Facebooks of tomorrow. They are big enough and fast-growing enough to turn a local economy around, or help protect a region from the impact of big-company layoffs.

A new study from the Ewing Marion Kauffman foundation analyzes the formation of $100 million startups over the past 30 years. Their conclusion: Economic lumps and bumps aside, the creation of new $100 million startups is fairly constant.

And where and how they form may surprise you.

Why $100M startups matter

What is it about startups that reach this benchmark that makes them important? The Kauffman survey found the $100 million benchmark is the point at which companies are more likely to go public.

This event usually showers wealth upon their investors and managers and gives the company growth capital for further expansion -- in fact, most of the job creation happens post-IPO. And 90 percent of the returns for the venture capital industry come from companies at this size or above. Those IPO paydays make fresh capital available for reinvestment in other startups.

To cap it off, banks find these larger startups more trustworthy, so they have a lower cost of capital, another factor that can fuel growth. To sum up, these companies acquire enough critical mass to compete with the big boys.

Top industries for high-growth startups

Conventional wisdom holds that all the hot, sexy startups are in high-tech. But that's not what the survey found.

In fact, the biggest category for $100 million startups is consumer discretionary products -- the "wanna have" consumables we decide we can't do without. Following next are industrial companies, despite what you may have heard about America becoming one big rust belt of shuttered factories. Healthcare is also a substantial sector for meaningful startup activity. (Financial services wasn't considered as a sector in the survey due to the industry's complexity and governmental ties.)

While information technology lags behind these top three, when you weight the sectors by their relative contribution to Gross Domestic Product, IT comes out better. Though fewer total $100 million companies came out of the sector, there are proportionally more in relation to the sector's contribution to GDP, and the ones that make it tend to ramp up faster than $100 million startups in other sectors.

Underachievers and overachievers

There is interesting analysis of where $100 million companies are born here as well. The Southeast, home of low minimum wage rates, led the nation by a wide margin, particularly in manufacturing. The runner-up was the Pacific/Western region.

At the state level, of about 20 companies that will reach $100 million are created annually, roughly 17 of them are created in just seven states: California, Florida, Illinois, Massachusetts, New York, North Carolina, and Texas. Four of those tend to come from California's Bay Area. The Golden State has declined in importance in this arena in the past 20 years, though -- in the 1990s, the survey found, California birthed 35 percent of the nation's new $100 million startups. Now, that's declined to near 20 percent.

Interestingly, some states are overachievers, producing more growth startups than you'd expect given their population and economic output. Top overachiever states are Massachusetts, Connecticut, Missouri, Minnesota, Colorado, and Washington, D.C.

On the flip side, some states are underperforming relative to their size and economic characteristics. The laggards the study identified: Louisiana, Alabama, South Carolina, Oregon, Arkansas, Ohio, and Wisconsin.

I've lived in the Seattle area long enough to see the birth of Amazon and how it's lifted this region. One thing is for sure: States should be looking at what they can do to improve the business climate and encourage the birth of fast-growth startups. They're a real economic shot in the arm.